Indian Libertarians

Central Planning | Part Two

srinivas.chakravarti Monday August 18, 2014

In an article published today (Monday 18 Aug) by Seetha, a senior journalist at Firstpost/Firstbiz, had this to say about State planning. Here is an extract - 

A lot of the ridicule attached to the Planning Commission came from the fact that the word 'planning' got inextricably associated with the Soviet Plans which inspired Jawaharlal Nehru to set up the body in the first place. But shorn of this negative connotation (and the accompanying paraphernalia), can one really argue that all planning is necessarily bad? Don’t large conglomerates work out long-term corporate plans and break it down into monitorable goals and targets? The difference probably is that a private corporation will give a lot of voice and autonomy to its constituent units, while governments typically tend towards centralisation and micro-management. The first error committed by the senior journalist is to compare planning by private firms, and planning by the State. It is true, the Planning Commission in the year twenty fourteen is seen as a relic of the Soviet era; however, there are many reasons as to why planning in the Soviet context is accepted as a massive failure. One of the reasons being the mass democide committed by Stalin and others.


One fact that is not frequently discussed anymore is the failure of central planning itself; not just its failure in the Soviet Union, but in all countries, which adopted outright socialism. The argument against central planning is not only applicable to socialist countries, but to virtually every modern social democracy which has existed in the last hundred years.


So what is State planning? Simply put, it is - An economic system in which economic decisions are made by the state or government rather than by the interaction between consumers and businesses.


The question arises, how do the central planners know the wants and needs of every individual at every moment of their lives? The central planners say this can be done by collecting data about the behavior of its citizens. So if data, and data collection is deemed to be accurate and precise, then why has central planning failed so spectacularly worldwide in the last hundred years? Is the data wrong? Is the data not up to date? Is the data collection method faulty? Is data collection complete, and comprehensive, yet is the analysis of the data faulty? Is there is a knowledge problem? Is there is a coordination problem? Is there a lack of consensus among citizens? Is there a weak political will? 


Central planners rarely accept their faults, since they would be unemployed if they were to accept, that their concept of central planning itself is wrong. How does central planning get its legitimacy? It does so by the support from the intellectuals who defend the State, primarily from its economists.


In fact, it is the economists who must make it clear to the public that regardless of the time, place, and people who do State planning; central planning will always fail.


The senior journalist continues - 

Every country needs – and many have – an institutional mechanism that provides independent, high-quality inputs for policy formulation and economic management. This has to be qualitatively different from the drawing up of voluminous five-year plan documents, sections of which were simply cut-and-paste jobs from earlier plans (with updated data) or routine notes sourced from the different ministries.  

One thing such a body should do is monitor macro-economic developments and suggest how to go about meeting challenges they pose or tapping into opportunities that they reveal. It should also study the cause of, and suggest creative solutions to, current pressing problems. Sure, there is a chief economic advisor and a planning unit in the finance ministry. But Pronab Sen, chairman of the National Statistical Commission who has spent close to two decades in the Planning Commission, has a point when he says the finance ministry looks at everything from the lens of economics and public finance, not in terms of development, which is more multi-dimensional. A weighty voice outside the finance ministry, which takes a more integrated view of how different sectors mesh together, will ensure that the Prime Minister does not become, as he puts it, captive to North Block. There we go again. The central planners need to be efficient. They need to collect accurate data, study it closely, and formulate macro indicators to ensure optimal planning. While the author criticizes the method of formulating previous Five Year plans, there is no problem foreseen in continuing the system of planning which will be more "multi-dimensional".

The finance ministry only looks at how a nation-wide scheme of building toilets will affect the exchequer; it may not be able (or willing) to connect the dots between sanitation, preventive health and the macro-economic effects of ill-health. On the other hand, administrative ministries will tend to overstate deficiencies to justify their existence or get more money out of the finance ministry. There is, therefore, a need for a body that will take stock of where the country stands on various developmental indicators, sound alarms when necessary and suggest what kind of action is required. The author in the paragraph quoted above, runs around in circles without realizing that central planning fails since there is no market price system to work with.


Almost all defenders of central planning say this - 

  • We need experts in various fields to become central planners, and they must be selfless, and devoted to the greater good of the people
  • We need accurate, and precise data about the economy in order to arm the experts to develop the most efficient plans
  • We need super-efficient implementation of the optimal plans, in order to achieve the goals of planning, and ensure planned outcomes
  • We need a feedback system to ensure plans are always kept optimal to keep up with the changing conditions of the market economy.
  • We need a system to groom the best, and brightest to become central planners to ensure the common good.

While most citizens in theory reject socialism, they wholly accept it in practice. Therefore, while many do study works of economics, which argue against central planning, in reality it is whole-heartedly embraced through the obsession with policymaking, which is simply a moderate form of Socialism.


While citizens, media persons, economists, and other experts shout out their opinions, here is a quote, which speaks the truth about them.

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance. The journalist does not outright argue for classical socialist central planning, but fails to see the faults in her reasoning, or if there is any reasoning present at all in her article.


To understand why State planning fails, we must understand that which lies at the heart of every market economy i.e. the free market. The foundation of the free market, indeed society itself is; private property. Only when we understand workings of the system of private property, we can fully appreciate the free market.


Read about the concept of private property here - http://mises.org/daily/4718


For an in depth understanding of the economic calculation problem, go here - http://library.mises.org/books/Ludwig%20von%20Mises/Economic%20Calculation%20in%20the%20Socialist%20Commonwealth_Vol_2.pdf 


Note: The argument presented is against socialism and its central planning, however it also applies by extension to modern State planning, based on macroeconomics; which itself is a mix of Neoclassical, Chicago, Keynesian, and New Keynesian schools.